Housing Market Struggles, REITs, and Stock Market Trends: What Investors Need to Know

Housing Market Struggles, REITs, and Stock Market Trends: What Investors Need to Know

The U.S. economy continues to face challenges and opportunities as both the housing and stock markets react to shifting economic conditions. Stock markets pulled back slightly on Friday after a week of gains, while the housing market hit a nearly 30-year low in home sales, highlighting ongoing affordability issues.

Here are the key takeaways from both markets and explore what investors should be paying attention to in the coming months.

The Housing Market Struggles to Rebound

Despite a growing U.S. population and strong consumer demand, homeownership remains increasingly out of reach for many Americans. Sales of previously owned homes dropped to 4.06 million in 2024, marking the second consecutive year of record lows since 1995.

Key factors driving the housing slowdown include:

  • Rising mortgage rates: The average rate on a 30-year fixed mortgage hovers around 7%, significantly higher than the sub-3% rates seen just a few years ago.
  • Record-high home prices: The median home price climbed to an all-time high of $407,500, up 4.7% from a year ago.
  • Low inventory: With only 1.15 million homes on the market—well below the historical average of 1.98 million—buyers are facing limited choices and rising competition.

What does this mean for investors?
The current housing market dynamic is pushing many would-be homebuyers to stay on the sidelines, creating opportunities in real estate investment trusts (REITs) and stock market sectors that benefit from rental demand, such as construction materials and rental property companies.

Stock Market Pullback Following Record Highs

While the housing market struggles, Wall Street has been riding high. The S&P 500, Dow Jones, and Nasdaq have all posted strong gains in recent weeks, but Friday's session saw a modest pullback:

  • S&P 500: Down 0.3% to 6,101.24, following a record high the previous day.
  • Dow Jones Industrial Average: Fell 140 points (-0.3%) to 44,424.25.
  • Nasdaq Composite: Dropped 0.5% to 19,954.30.

The pullback was largely attributed to cautious trading ahead of next week's Federal Reserve meeting, where investors are closely watching for signs of future interest rate cuts.

What’s Driving the Stock Market?

  1. Earnings Season:

    • Companies such as Texas Instruments and CSX reported profits that met or exceeded expectations but faced market pressure due to concerns about future revenue growth.
    • Novo Nordisk and NextEra Energy saw significant gains as they reported strong results and promising growth prospects.

  2. Treasury Yields:

    • The 10-year Treasury yield eased to 4.61%, reflecting investor uncertainty over inflation and interest rate policies.
    • Higher yields make borrowing more expensive and can put downward pressure on stock prices, especially in sectors sensitive to debt, such as real estate and utilities.

  3. Consumer Sentiment:

    • A recent report from the University of Michigan showed consumer confidence declined in January, signaling potential headwinds for the economy.
    • Retail giants such as Walmart and Target have reported mixed outlooks for consumer spending in 2025.

Housing and Stock Markets: The Intersection

The housing market and stock market are more interconnected than many investors realize. Rising interest rates not only push mortgage costs higher but also affect corporate borrowing, leading to ripple effects across various sectors.

As President Donald Trump takes office for his second term, his policies—particularly related to tariffs, deregulation, and potential housing incentives—could have profound impacts on both markets. Investors should stay informed on how these policies might create opportunities or risks in the coming months.

How Index Rebalancing Can Help Navigate Market Uncertainty

Popular REIT ETFs such as the Vanguard Real Estate Index Fund ETF (VNQ) trade on the NYSE.

Some REIT ETF choices include:

  1. Vanguard Real Estate ETF (VNQ): Extremely popular among REITs, focused on U.S. markets, and has a 0.12% expense ratio.
  2. iShares Core U.S. REIT ETF (USRT): USRT provides exposure to U.S. REITs with a low expense ratio of 0.08%.
  3. Schwab U.S. REIT ETF (SCHH): Tracks the Dow Jones Equity All REIT Capped Index with another low expense ratio of only 0.07%.
  4. Fidelity MSCI Real Estate Index ETF (FREL): Another U.S. real estate stocks ETF with an expense ratio of 0.08%.
  5. iShares Global REIT ETF (REET): U.S. and international exposure with an expense ratio of 0.14%.
  6. Vanguard Global ex-U.S. Real Estate ETF (VNQI): All international exposure with an expense ratio of 0.12%.
  7. iShares Residential Real Estate ETF (REZ): Focused on related investments such as public storage, residential, or healthcare with an expense ratio of 0.48%

Do exhaustive research before making any investments, REITs may or may not be right for your portfolio at this time.

With both the housing and stock markets experiencing volatility, now is the perfect time to consider Index Rebalancing as a strategic tool to:

  1. Manage risk: Balance exposure across asset classes to hedge against potential downturns in any single sector.
  2. Capture growth: Ensure allocations remain aligned with market trends and profit-taking opportunities in high-performing sectors.
  3. Adapt to interest rate changes: As the Fed considers further rate cuts, rebalancing helps keep your investments optimized for growth and stability.

Whether you're invested in exchange-traded funds (ETFs) like QQQ and SPY, or building a diversified portfolio, staying disciplined with regular rebalancing ensures you're making the most of market fluctuations.

Looking Ahead: Key Events to Watch

  1. Federal Reserve Meeting: Investors are eager to see whether the Fed holds rates steady or signals future cuts in response to mixed economic data.
  2. Upcoming Earnings Reports: Tech giants and financial institutions will provide further insights into corporate health and market direction.
  3. Housing Policy Changes: The Trump administration's stance on housing supply and interest rates could shift market dynamics significantly.

Final Thoughts

Both the housing and stock markets are facing critical turning points. While rising mortgage rates and record home prices are keeping many potential buyers out of the market, strong corporate earnings and easing bond yields are supporting stock prices.

Investors looking to navigate these changes should consider strategic moves like Index Rebalancing, which can help optimize portfolios and stay ahead of market trends.

Ready to take control of your investments? Stay informed and take action with our comprehensive Index Rebalancing Guide, ensuring your portfolio stays strong no matter the market conditions.

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